Europe's Rescue Fund Not 'Ultimately Sustainable,' Krugman Says

Published 2:01 am, Wednesday, November 30, 2011

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Oct. 28 (Bloomberg) -- Europe's efforts to beef up its temporary rescue fund are unlikely to be successful as the region stretches the credibility of its AAA rated members, Nobel Laureate Paul Krugman said.

Europe's bailout fund "looks like it's not ultimately sustainable," Krugman said in an interview in Reykjavik late yesterday. Efforts to retool the fund "may buy time, but they are calling it a super AIG for a reason," he said.

Euro-area leaders are trying to increase the scope of the European Financial Stability Facility to 1 trillion euros ($1.4 trillion) through a combination of insuring first losses on bonds and by creating a special purpose vehicle to attract external investment. American International Group Inc. was the U.S. insurer propped up by multiple bailouts starting in 2008 that swelled to $182.3 billion.

"They are basically trying to use the credibility of the pieces of the Eurozone which are still AAA rated to create confidence," Krugman said. "Doesn't seem like there's that much scope for that, at this point."

The AAA rated EFSF relies on the six countries in the 17- member euro bloc that enjoy top credit ratings to price its bonds. Still, the region's financial strength may soon be concentrated in Germany, as France's top credit rating comes under pressure.

France's AAA

Moody's Investors Service said on Oct. 17 that France's rating may suffer from a deterioration in debt metrics and the risk of added liabilities from the debt crisis. France is among euro-region sovereigns likely to be downgraded in a stressed economic scenario, Standard & Poor's said four days later.

"The fiscally strong governments are basically now Germany," Krugman said. "France is now even looking a bit shaky and more than a little shaky. Ultimately, this thing is going to have to be backed by the power of the printing press."

That means the European Central Bank will need to do more to help politicians end the crisis, he said. Europe's leaders this month promised to safeguard the independence of the ECB by not tapping more of its funds to pay their way out of the crisis.

The crisis led the ECB to start purchasing government bonds after the region's most indebted nations were unable to get affordable market funding. The controversial move contributed to the resignations of ECB Chief Economist Juergen Stark and former Bundesbank President Axel Weber. Krugman said the bank didn't go far enough and should print money to ease the debt crisis.

"At some point the ECB has to be willing to play that role within the Eurozone," he said. "The worst players, as far as I'm concerned, in terms of giving bad advice and brushing aside problems, are not the people demonstrating in the streets of Athens, it's the people at the European Central Bank."